Cliff Talks: Boehner Bends on Taxes and Debt Limit
Policy + Politics

Cliff Talks: Boehner Bends on Taxes and Debt Limit

REUTERS/Kevin Lamarque

In a sign that Republicans may be waving a white flag of surrender, House Speaker John Boehner has made two major concessions to President Obama in the waning days of their crucial fiscal cliff negotiations: One is to allow income tax rates to rise on everyone making more than $1 million a year and the other is to boost the $16.4 trillion debt ceiling enough to enable the government to continue to borrow and pay its debts for another year.
Those concessions, made by Boehner during a phone conversation with Obama last Friday afternoon and reported by the Washington Post and other publications, represent a seismic movement that potentially could produce the outlines of a “grand bargain” before Christmas aimed at sharply reducing the deficit over the coming decade.
The two sides have been at loggerheads since the Nov. 6 election over a major budget, tax and entitlement reform plan deemed essential before Congress and the White House can agree to measures to block more than $600 billion of automatic tax hikes and spending cuts from automatically occurring around the first of the year.  Federal Reserve Board Chairman Ben Bernanke and scores of other economists and research groups have warned that the economy could be thrust back into a recession, with millions of workers laid off in in the defense industry and other sectors, unless Congress and the administration reach an accord.
Until Boehner and the president conferred on Friday, shortly after news broke of the massacre at an elementary school in Newtown, Conn., the major obstacles had been the Republicans refusal to raise tax rates for those earning more than $250,000 a year, as the president has insisted, and the GOP's demand that Obama and the Democrats reveal how they would go about achieving major savings in Medicare, Medicaid and other entitlement programs in return for the Republicans’ offer to raise $800 billion in tax revenue through reforms of the tax code.

Moreover, a handful of Republicans including Sens. Lindsey Graham of South Carolina and Bob Corker of Tennessee proposed that their party leaders attempt to hold the debt ceiling hostage -- just as they did during the summer of 2011 -- until Obama and the Democrats bowed to their demands to agree to major spending and entitlement cuts. "The president is going to be in for a rude awakening if he thinks he’s going to get the debt ceiling increase without addressing [entitlements and] lowering debt,” Graham told The Fiscal Times last week.

But Boehner offered to push any fight over the federal debt limit off for a year, a concession that would deprive Republicans of leverage in the budget battle, the Post reported last night. With the U.S. Treasury coming close to exhausting its current borrowing authority, Congress risks the government defaulting on its borrowing or missing payments for government operating costs my mid-February unless a deal is made to raise the debt ceiling again.

For sure, neither of Boehner’s offers meets the specific demands laid down by Obama in the wake of his reelection and will be the topic of further negotiations. But taken together, the tax and debt ceiling offers were viewed as a breakthrough by some Democrats, and signaled a willingness by the speaker to risk the wrath of conservatives on his right in order to negotiate a deal to avert the fiscal cliff.

The White House reportedly rejected Boehner’s offer for raising tax rates on millionaires, saying it would generate too little revenue to significantly dent record budget deficits and do nothing to extend emergency unemployment benefits into the new year.
And Obama is pressing to permanently end the minority party's long standing practice of using the debt ceiling as leverage to extract concessions from the White House, as was the case in 2011 when Obama was forced to make numerous concessions on spending cuts before the Republicans relented at the last minute and agreed to extend the Treasury's borrowing authority.
That debt ceiling debacle, along with no real plan to reduce entitlement spending, prompted Standard & Poor's, the rating agency, to downgrade the gold-plated U.S. credit rating for the first time in history. S&P and other ratings agencies are threatening to downgrade the U.S. again if there is a repeat of that sort of political brinksmanship.

Obama has made it clear he will not repeat his mistake of allowing the Republicans to treat the country’s debt ceiling as a bargaining chip, with so much riding on getting the economy back on track. The Treasury’s current $16.4 trillion borrowing authority will be tapped out early next year, and the president is demanding that Congress cede him the authority to raise the debt ceiling independent of the legislative branch.

“We are not going to play that game next year,” Obama said in a speech to the Business Roundtable last week. “If Congress in any way suggests that they’re going to tie negotiations to debt ceiling votes and take us to the brink of default once again as part of a budget negotiations . . . I will not do it.”
Yet if he were to accept Boehner's offer of a one year extension of the debt ceiling, he would find himself back in the same predicament a year from now, with the Republicans once again using the ceiling as a bargaining chip to demand deep spending cuts.  At that time, the president would have less influence than he has now in his post-election surge in popularity and public approval. Polls show that Americans are more inclined to follow Obama's lead on taxes and the economy than the Republicans, but that could change as time goes by.
Boehner and Obama have not spoken directly since the Friday afternoon phone call when Boehner extended his latest offer. Obama was in Newtown Sunday night to attend a Sunday-night service for victims of Friday’s elementary school massacre. Aides were uncertain when their next meeting would take place.
In exchange for the higher rates for millionaires, Boehner is demanding changes to federal health and retirement programs, which are projected to be the biggest drivers of future federal borrowing. Boehner wants $1 trillion in total savings, starting with adoption of a less generous way of calculating inflation that would save $200 billion over the next decade — about two-thirds of it by reducing Social Security cost-of-living adjustments.
Obama has offered $600 billion in spending cuts, with only $350 billion coming from health programs and none from Social Security. Many congressional Democrats adamantly oppose dragging the program into the year-end talks.  On the tax front, the president will insist that many wealthy people making less than $1 million a year pay hirer tax rates -- although possibly making the threshold $375,000 or even higher instead of $250,000.
He also reportedly wants higher taxes on inherited estates, as well as new limits on tax breaks enjoyed by the wealthy, to bring total new taxes to $1.6 trillion. White House officials last week dropped their tax demand to $1.4 trillion and may be willing to go lower, Democrats said.